Nora is starting a business, if she invests X dollars, she will be able to sell...
Nora is starting a business, if she invests X dollars, she will be able to sell the business for 100(x)0.5 dollars, which means the marginal benefit of an additional dollar of investment is
50/(X) 0.5. Nora's net profit will be 100(X)0.5 - X. Nora's marginal cost of investing a dollar is MC=1.
Instructions. Enter your answers as whole numbers
a. How much should she invest?
b. How much profit will she earn?
c. Now suppose Nora is overconfident: she believes she will be able to sell the business of 200 (X) 0.5 dollars, which means she think the marginal benefit of an additional dollar of investment is 100/(x)0.5.
How much will she invest?
d. What level of profit will she expect to earn?
e. How much profit will she actually earn?
f. By how much does her overconfidence reduce her profit?
Please show all work.
Homework Answers
Q.
a.
She should invest till the point where MB = MC of investment.
gives:
X = 2500.
She should invest $2500.
b.
Net profit:
c.
She should invest till the point where MB = MC of investment.
gives:
X = 10000.
She should invest $10000.
d.
She expects to earn more than $2500.
e.
Net profit:
f.
Her overconfidence reduces her profit by %2500 or 100%.
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